Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2018 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales	Actual Warranty Expenditures
$5,780,000	$38,500

Required:
1. Does this situation represent a loss contingency?
2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2018.
3. What amount should Cupola report as a liability at December 31, 2018?
  

Answer 1

1
Yes, this situation represent a loss contingency
A reasonably accurate estimate of the expense can be made.
2
		Debit	Credit
1	Accounts receivable	5780000
	Sales revenue		5780000
2	Warranty expense	173400		=5780000*3%
	Estimated warranty liability		173400
3	Estimated warranty liability	38500
	Cash, wages payable, parts and supplies, etc.		38500
3
	Liability at December 31, 2018	134900		=173400-38500